It’s Official: Akamai To Acquire Cotendo, Good For Akamai, Bad For Customers

As expected, this morning, Akamai announced that they have agreed to acquire privately held Cotendo for $268M, in a deal that is expected to close in the first half of 2012. While Akamai always portrayed to the market that Cotendo was never really any threat to their business, Cotendo was starting to put pressure on some of Akamai’s higher margin revenue and winning some big deals in the market. The fact Akamai paid about 6x revenue for Cotendo (updated:just to clarify, the deal is valued on expected 2012 revenue, not 2011 trailing revenue. Cotendo did about $30M in revenue this year) is a testament to the value of what Cotendo built and the impact they were starting to have on Akamai’s business. This is a good acquisition for Akamai and will help to shore-up their value add services and clearly the street likes it as Akamai is up over $4 a share as I write this post.

Cotendo launched on March 11th, 2009, and in less than three years, built out a very robust platform for application acceleration, dynamic site acceleration and mobile content acceleration with Facebook, HTC, Conde Nast, Answers.com, Vistaprint, Digg, Mashable and Bayer as customers. While I have seen others say that Cotendo’s core focus is mobile, most of their revenue is not from the mobile sector. Cotendo released their mobile acceleration product only six months ago, (here’s details on how it works), so most of their revenue it not from mobile delivery today. That said, Akamai knows where mobile is headed so Cotendo’s mobile product is a great fit into Akamai’s product portfolio not to mention, Cotendo’s DSA product was out-performing Akamai’s DSA product by up to 20% based on feedback from many of Cotendo’s customers.

Because AT&T licensed re-sells Cotendo’s technologyto run on the AT&T network, AT&T did have right of first refusal to purchase Cotendo. But from what I hear, AT&T never made a serious offer for the company and Akamai wasn’t bidding against anyone else. To me, it’s a bad sign for AT&T that they didn’t step in to acquire Cotendo as it would have shown they are serious about the overall CDN space. What happens to AT&T’s products and services that rely on Cotendo’s technology is not known, but clearly there won’t be any more software updates from Cotendo and AT&T will have to build out any additional functionality to the platform on their own. it is expected that AT&T will stop re-selling Cotendo once Akamai acquires them and that AT&T will now default to EdgeCast for some of these same services since EdgeCast’s software is running diectly on AT&T’s network.

While this acquisition is great for Akamai and their business, it’s bad for the industry and for customers as a whole. Competition is a good thing because it makes companies innovate faster, helps foster quicker adoption of technology, drives pricing down in the industry and with more companies selling the same service, it creates better awareness in the market. With Akamai taking out Cotendo, they have locked up the market for app acceleration and mobile acceleration and are the clear leader, in terms of revenue, for DSA offerings. That’s not to say that others won’t compete over time (Amazon will, EdgeCast also), but Cotendo was really the only company that was getting some good traction in the market for these services, had some real revenue and customers to show for it and was putting pressure on Akamai.

With one vendor now controlling the vast majority share of the market, Akamai has no pressure to reduce pricing. Pricing for these services will go up, not down, the same way CDN pricing did when Akamai acquired Speedera. I’m sure Akamai will say otherwise, but with Cotendo customers saying that Cotendo was on average 30% cheaper than Akamai, that pricing difference will disappear once the acquisition is done and contracts have to be renewed. While some vendors like Limelight Networks, CDNetworks, AT&T, Level 3 and EdgeCast are trying to focus their products and services on more of what Cotendo was doing, none of them have gotten the kind of traction Cotendo has and it will still be awhile before any of them compete with Akamai at scale.

While this is a good acquisition for Akamai, there is one danger to it. Akamai needs to understand that many of Cotendo’s customers don’t want to work with Akamai or have left Akamai for Cotendo. Akamai has a history of acquiring competing companies, shutting their services down and essentially migrating all of those customers over to Akamai’s already exisiting products. In this case, that won’t work. Akamai has to keep Cotendo’s products alive and integrate them with the Akamai network in order for this to work.

After hearing the news, I reached out to some of Cotendo’s customers who naturally, weren’t happy to hear that Akamai would acquire Cotendo. One of them said, “the whole reason we are with Cotendo is that we didn’t want to be on the Akamai network anymore“. That’s the argument that many of Cotendo’s customers are going to have, so Akamai has their work cut out for them to make sure Cotendo’s customers feel like they can still use Cotendo’s platform, on the Akamai network.

One thing I hope for from this deal is that Cotendo’s culture may be able to rub off on Akamai. Cotendo is quick and nimble, they follow up with customers quickly, develop and roll out new products fast and are thought of as easy to work with. Akamai may be the leader in the market, but they are still very slow with new product introductions, are anything but nimble and customers still tell me all the time that it takes Akamai weeks to do things that their competitors do in days. Akamai’s management knows that the culture of the company needs to change, that their marketing message needs to be overhauled and that the value proposition of products and services, like their HD Network, aren’t being highlighted correctly. Hopefully Cotendo’s culture can help assist Akamai with that.

Note: I have a lot of emails from people asking me to call them to get my comments on the deal and I will get to all of them as I can. I am doing a lot of media calls as well, so if you have a question, you can reach me on my cell at 917-523-4562. I will return all calls.

Dan, as a Cotendo customer I agree with you. It’s bad for us as we now don’t have many other options in the market. I don’t fault Akamai for the deal, they want to expand their business and Cotendo is very good at what they do. But more choices means better pricing, less vendors will mean higher pricing. I wonder who will now try to take Cotendos place.

http://www.edgecast.com James Segil

S.G. – in response to the question you posed, EdgeCast has spent the last year evolving our offering for Dynamic Content Acceleration in the market with customers. We call it A.D.N – Application Delivery Network and given the fact that we offer a comprehensive CDN offering that includes a true dynamic content acceleration service for un-cachable content, it makes us the viable alternative in the market.

http://www.limelight.com Stephen Condon

For those that may not be aware, Limelight Networks offers a full suite of value added services to accelerate the delivery of both dynamic and static content. Over the past 2.5 years we have developed a suite of Acceleration Services (http://www.limelight.com/website-application-acceleration and most recently acquired Israeli based Acceloweb to enhance our capabilities and further accelerate the delivery of web and mobile applications for the marketplace. This value added stack, fully integrated into one of the largest distributed computing platforms and largest IP networks in the world, gives the market a unique and compelling choice and approximately 500 Enterprise customers have made the decision to choose Limelight . Please reach out if you’d like some customers testimonials or references.

Brian

Dan – Any comment on what Gartner is saying that Cotendo’s performance is only better in specific use cases?
Akamai buys Cotendo
from Lydia Leong
I am not going to publicly blog a detailed analysis of this acquisition, although Gartner clients are welcome to schedule an inquiry to discuss it (thus far the questions are coming from investors and primarily have to do with the rationale for the purchase price, technology capabilities, pricing impact, and competitive impact). I do feel compelled to correct two major misperceptions, though, which I keep seeing all over the place in press quotes from Wall Street analysts.
First, I’ve heard it claimed repeatedly that Cotendo’s technology is better than Akamai’s. It’s not, although Cotendo has done some important incremental engineering innovation, as well as some better marketing of specific aspects (for instance, their solution around mobility). I expect that there will be things that Akamai will want to incorporate into their own codebase, naturally, but this is not really an acquisition that is primarily being driven by the desire for the technology capabilities.
Second, I’ve also heard it claimed repeatedly that Cotendo delivers better performance than Akamai. This is nonsense. There is a specific use case in which Cotendo may deliver better performance — low-volume customers with low cache hit ratios due to infrequently-accessed content, as can occur with SaaS apps, corporate websites, and so on. Cotendo pre-fetches content into all of its POPs and keeps it there regardless of whether or not it’s been accessed recently. Akamai flushes objects out of cache if they haven’t been accessed recently. This means that you may see Akamai cache hit ratios that are only in the 70%-80% range, especially in trial evaluations, which is obviously going to have a big impact on performance. Akamai cache tuning can help some of those customers substantially drive up cache hits (for better performance, lower origin costs, etc.), although not necessarily enough; cache hit ratios have always been a competitive point that other rivals, like Mirror Image, have hammered on. It has always been a trade-off in CDN design — if you have a lot more POPs you get better edge performance, but now you also have a much more distributed cache and therefore lower likelihood of content being fresh in a particular POP.

P.B.

Brian:
The comment you posted shows a fundamental misunderstanding of how DSA works. Cache hit ratios are irrelevant.
That said, in our testing, Cotendo was always fastest for static content, with EdgeCast closely behind. Akamai trailed both of them, even though their POPs sit in ISP DCs rather than major exchanges/interconnect points ala Cotendo/EdgeCast.
We’re a Cotendo customer, and while their DSA offering/technology/software is more advanced than everyone else, their network was good but not great in some regions. IMHO, the best CDN provider would be a combination of Cotendo technology on top of the Akamai network.

Miguel

Dan,
It’s obvious there’s lots of alternatives out there. Besides the above mentioned, Level 3 has Site Transformer which has proven it’s out performed Akamai DSA and WAA in many occasions!
Customers of Akamai are tired of paying HUGE premiums year after year and for what? How many of the large retail sites go down EVERY Black Friday? I counted 4 of them this year.
No, I think this market is going to heat up and we’ll see prices drop!

http://www.StreamingMediaBlog.com Dan Rayburn

@Brian,
Cotendo is only better at Akamai in certain cases. No one vendor, Akamai or Cotendo, is “always” better. It depends on what the customer is trying to accomplish.
But there is no debating that many customers were getting better performance from Cotendo than Akamai for certain services. I don’t decide this, customers do and many of them, like the one above, have been very vocal about this. Also, the fact Akamai paid so much, in cash, for Cotendo shows what impact they were starting to have on Akamai’s business.

rime

I agree with you @Brian. There are always differences from one company to another. Not all companies have what customers are looking for.

Daily posts by Dan Rayburn about the online video industry, business trends & analysis, market data & research as well as the online video business models in the media & entertainment, broadcast, advertising & enterprise industries.